Campaign Payola Lives On

In one of the most disturbing Supreme Court decisions in some time, 5 justices voted to overturn Campaign limitations for huge corporations and unions.

The 5-to-4 decision was a doctrinal earthquake but also a political and practical one. Specialists in campaign finance law said they expected the decision, which also applies to labor unions and other organizations, to reshape the way elections are conducted.

“If the First Amendment has any force,” Justice Anthony M. Kennedy wrote for the majority, which included the four members of its conservative wing, “it prohibits Congress from fining or jailing citizens, or associations of citizens, for simply engaging in political speech.”

Justice John Paul Stevens read a long dissent from the bench. He said the majority had committed a grave error in treating corporate speech the same as that of human beings. His decision was joined by the other three members of the court’s liberal wing.

I’d personally like Justice Kennedy to explain to me how a huge multinational corporation is an ‘association’ of citizens. The ruling literally opens the floodgates to big money. Here’s two responses from two very different politicians. This quote comes from the NYT article referenced above.

Senator Mitch McConnell of Kentucky, the Republican leader and a longtime opponent of that law, praised the Court’s decision as “an important step in the direction of restoring the First Amendment rights of these groups by ruling that the Constitution protects their right to express themselves about political candidates and issues up until Election Day.”President Obama issued a statement calling on Congress to “develop a forceful response to this decision.”

“With its ruling today,” he said, “the Supreme Court has given a green light to a new stampede of special interest money in our politics. It is a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans.”

Politico suggests the decision will help more Republicans than Democrats to raise funds.

The decision, handed down in a special session of the court, is generally expected to boost Republicans more than Democrats, because corporations and corporate-backed outside groups tend to align with conservatives and also often have access to more money than unions or liberal outside groups.

“No sufficient governmental interest justifies limits on the political speech of nonprofit or for-profit corporation,” Justice Anthony Kennedy wrote for the majority.

In a stinging dissent, Justice John Paul Stevens wrote that the ruling “threatens to undermine the integrity of elected institutions across the nation. The path it has taken to reach its outcome will, I fear, do damage to this institution.”

NPR points to one part of campaign finance reform that remains.

At the same time, NPR’s Peter Overby points out that one important limit remains intact: Corporations still cannot give money directly to federal candidates or national party committees. That limit dates to 1907. The justices also upheld some other restrictions, including disclosure requirements for nonprofit groups that advocate for political candidates.

The original case before the court seemed an improbable vehicle for such a dramatic re-examination of campaign funding regulations.

Brought by Citizens United, a nonprofit group, against the Federal Election Commission, the case presented a seemingly straightforward question: Do campaign finance restrictions on corporate spending apply to Citizen United’s plan to run advertisements for an anti-Hillary Clinton documentary at the peak of her 2008 presidential run?

But the high court ended up in a much broader examination of constitutional issues that questioned the entire system that has been built up over decades to regulate the role of corporate money in politics.

Marc Ambinder at The Atlantic explains what this means to our current financing system which brought about the creation of PACs.

This basically eliminates a middleman: before today, corporations and unions had to set up PACs (political action committees), filed separately with the IRS, that would receive donations. And they did. Corporations and unions spend millions of dollars on elections. Now, however, the accounting firewall is gone, and Wal-Mart or the Service Employees International Union, for instance, can spend their corporate money directly on candidates.

We might as well borrow the jacket labeling idea from NASCAR and assign each candidate a corporate sponsor logo. This is just one more step towards ensuring we’ll all be slaves to big Oil, big Defense, Big Finance, and Big Medicine. Who owns your Senator and Representative?

Can We stop the Next Madoff or the next AIG?

I know you think I spend a lot of time obsessing on financial market regulations. Part of this obsession is an occupational hazard, but a good deal of it has to do with how close I am supposed to be to cashing in on a well-earned retirement while rectifying my retirement savings with the worst decade of stock returns ever. So, here I am referring to Bloomberg again.

This time the person of interest is Mary Shapiro and the regulator is the SEC. Yup, I’m off the Fed for at least one thread. The article today is Wall Street Waits as SEC Fails to Bring Madoff-Inspired Reforms. I’m trying to fight off my gut feeling that everything’s been a Ponzi Scheme recently while writing this particular thread. Still, I have to feel a bit admiration for Shapiro who has probably walked into the nation’s most neglected regulator since the Bush decade of corporate decadence made it the rubberstamp of millionaire investment bankers.

Shapiro’s really been putting in the hours. Here’s one of the things that’s been tops on my list as an academic that researches financial economics, the ratings agencies, as well as the one market that really came apart at the seems last year, that for money market accounts which are more depository and less speculative than the current rules recognize.

The SEC is reviewing public comments on the still- unfinished credit-rating rules, which would require companies such as Moody’s Investors Service and Standard & Poor’s to disclose how much revenue they get from their biggest clients and subject their employees to the same liability standards as auditors.

Schapiro also has yet to complete work on rules for money market funds. After last year’s collapse of the $62.5 billion Reserve Primary Fund, the Obama administration called the industry a “significant source of systemic risk.” SEC commissioners plan to vote next year on a proposal to force funds to hold a bigger share of their assets in investments that are easy to liquidate.

Still there is so much work to be done to get the entire regulatory scheme into the 21st century that you have to feel like she has a Sisyphean task ahead. Hedge funds have been pressing hard to avoid any curbs on short-selling. Naked Shorts have frequently been a source of great volatility in markets. She’s also seeking more authority to run more comprehensive examinations of the holders of the nation’s largest accounts. That’s not buying her many fans on Wall Street and the lobbyists have, of course, have managed to stall some of those attempts.

All and all, anything that leads to increased translucence and standardization of processes reduces information asymmetry and lets the public know about their investments is a good regulation. This type of regulation actually increases the functioning of the market rather than burdens it. Hopefully, the Democrat congress will see more benefit to updating the regulation of financial markets than it’s republican predecessors. Still, the intense involvement of the financial community in the Obama campaign was hard to miss and the distinct lack of support for tougher regulation is hard to miss. The financial lobby has deep pockets and broad influence in the nation’s capitol.

Some of the toughest battles over regulation have to do with giving stockholders more influence over Board of directors with their role of setting executive pay and perks. The U.S. Chamber of Commerce, a powerful lobby, hates these efforts.

The U.S. Chamber of Commerce, which represents more than 3 million companies, called the SEC plan “unworkable” in an August letter. The nation’s largest business lobby has also been discussing with Gibson, Dunn & Crutcher LLP attorneys a strategy for suing the SEC, said Tom Quaadman, a Chamber executive director.

By September, Schapiro’s staff began telling investors that the so-called proxy-access rules wouldn’t be in place for 2010 director elections. In October, the SEC publicly announced the delay.

Schapiro said the SEC still hopes to approve the rule in the first three months of 2010. “It’s a pretty profound change to the fabric of corporate governance,” she said in the interview. “We need to do it carefully and thoughtfully.”

Her agenda has sometimes been driven by political pressure, said James Angel, a finance professor at Georgetown University in Washington who has served as an adviser to stock exchanges.

One of the most interesting portions of this article was the interplay reported between Congress and the SEC. You may want to read that portion alone. Here are two noteworthy efforts by Barney Frank and Charles Schumer.

The effort to curtail short-selling, in which traders borrow stock and sell it, hoping to profit by replacing the shares at a lower price, followed lobbying from Democratic lawmakers after the Standard & Poor’s 500 Index fell 19 percent in the first two months of the year.

Representative Barney Frank, chairman of the House Financial Services Committee — the SEC’s overseer in the House — announced Schapiro’s plans for her at a March 10 press conference. The Massachusetts Democrat said he was “hopeful,” after speaking with the SEC boss, that she’d reinstate the uptick rule “within a month.” The SEC in 2007 had scrapped the rule, which required investors to wait for the price of a stock to rise before executing short sales.

In July, the prodding came from Senator Charles Schumer. The New York Democrat urged Schapiro, a political independent, to ban flash orders, which such trading venues as Direct Edge Holdings LLC were using to take market share from NYSE Euronext.

They’re also seeking to give the SEC authority over derivatives which have been the estranged stepchild of regualtion for some time now.

Traders use the mostly unregulated contracts to speculate on everything from interest rates to oil prices, and companies use them to protect against losses. Obama administration officials say a lack of transparency in the $605 trillion derivatives market exacerbated the credit crisis and contributed to the near-failure of American International Group Inc., once the world’s biggest insurer.

Under lawmakers’ plans, banks and investors would trade contracts on regulated platforms that are monitored by the SEC and Commodity Futures Trading Commission. Having won the battle to share oversight of derivatives with the CFTC, Schapiro now must prove that her agency can manage the new responsibility. In preparation, she has hired economists and former Wall Street traders to add market expertise to an agency staff made up mostly of attorneys.

I’d like to think that Shapiro, Frank, Schumer and the Justice Department will work this year on ending the mishmash of old regulations and no regulation that has characterized the century so far. It’s probably no coincidence that the unraveling of most of the banking laws meant to stave off a Great Depression happened prior to the Great Recession. That’s not saying that we need to re-erect the old laws word-for-word. It simply means that we need to recognize that financial markets are somewhat like football games. The work a lot better when you can watch the re-plays and see all the angles of the plays, and when there’s an agreed upon set of rules that every one knows and follows. It also helps to have a set of really good referees to watch the players and enforce the rules and that’s where the FED and the SEC come in. Financial regulation shouldn’t be a burden to any market participant. If anything, regulation should provide a playing field where every one can enjoy the game. Especially, those of us that either rely on the game for our living or our retirements. The country can’t afford another decade of lost returns.